Electricity market design

An integrated EU energy market is the most cost-effective way to ensure secure, sustainable and affordable energy supplies to EU citizens. Through common energy market rules and cross-border infrastructure, energy can be produced in one EU country and delivered to consumers in another. Creating competition and allowing consumers to choose energy suppliers keeps prices in check.

Electricity market design rules

The share of electricity produced by renewable energy sources (predominantly solar and wind) is expected to grow from 37% in 2020 to more than 60% by 2030.

At the same time, electricity must also be produced and delivered in sufficient quantities when there is no wind or sun. Markets need to adapt to better integrate renewable energies and attract investment in fossil-free flexible technologies, such as demand side response and energy storage, that can complement variable energy production. The market must also provide the right incentives for consumers to become more active and contribute to keeping the electricity system stable. The market needs to be transparent and efficiently monitored in order to ensure open and fair competition and protect against market abuse and manipulation.

Clean energy for all Europeans package

The EU adopted in 2019, as part of the 'Clean energy for all Europeans package', 4 pieces of legislation aimed at further adapting EU market rules to the new market realities.

1 regulation and 1 directive on electricity
1 regulation on risk preparedness
1 regulation on the Agency for the Cooperation of Energy Regulators (ACER

These rules are further explained below.

Reform of the Energy Market Design

In the wake of the difficulties in the EU energy market seen in 2022, with particularly high and volatile prices and serious concerns about security of supply, EU heads of government called on the Commission to work swiftly on the structural reform of the electricity market, with the dual objective of securing European energy sovereignty and achieving climate neutrality.

Following a public consultation in early 2023, the Commission presented a proposal on 14 March to revise the rules for electricity market design and for improving the EU protection against market manipulation in the wholesale energy market. It aims at making the EU energy market more resilient and making the energy bills of European consumers and companies more independent from the short-term market price of electricity. This can be done by way of using more long-term contracts, such as power purchase agreements, and investment support should be structured as two-way contracts for difference. The aim is to better protect consumers, accelerate the deployment and better integration of renewables in the energy system, but also to enhance protection against market manipulation stability and predictability of the cost of energy and thereby contribute to the competitiveness of the EU industry.

The proposal has now passed to the Council and the European Parliament for debate and negotiation under the normal legislative procedure.

In parallel, and on the same date, the Commission published a Staff Working Document and a series of recommendations on issues of energy storage.

The Electricity Directive and Electricity Regulation

In its current format, the Directive on common rules for the internal market for electricity (EU/2019/944) and the Regulation on the internal market for electricity (EU/2019/943), puts the consumer more at the centre of the clean energy transition and enable the active participation of consumers, whilst putting in place a strong framework for consumer protection.

By allowing electricity to move freely to where it is most needed, society will increasingly benefit from cross-border trade and competition. They will drive the investments necessary to provide security of supply, whilst decarbonising the European energy system.

The rules contribute to the EU's goal of being the world leader in energy production from renewable energy sources by allowing more flexibility to accommodate an increasing share of renewable energy in the grid. The shift to renewables and increased electrification is crucial to achieving carbon neutrality by 2050. The electricity market design, therefore, helps to achieve the goals set out in the European Green Deal and contributes to the creation of jobs and growth.

Risk preparedness

The Regulation on risk preparedness in the electricity sector (EU/2019/941) requires EU countries to prepare plans for how to deal with potential future electricity crises and put the appropriate tools in place to prevent, prepare for and manage these situations.

This initiative followed an independent report from May 2015, which highlighted previous experience showing that EU countries’ responses to potential crises tended to focus on the national context only, disregarding cross-border effects and thereby sometimes even exacerbating the problems, undermining the functioning of the market and driving up energy bills.

The regulation requires that EU countries, using common methods, identify all possible electricity crisis scenarios at national and regional levels and then prepare risk preparedness plans based on these scenarios. Above all, this preparation requires they cooperate and coordinate with neighbouring countries in a spirit of solidarity. It also establishes a framework for more systematic monitoring of security of supply issues via the Electricity Coordination Group.

The Regulation on wholesale energy market integrity and transparency

The Wholesale Energy Market Integrity and Transparency (REMIT) Regulation (EU/1227/2011) ensures that consumers and other market participants can have confidence in the integrity of electricity and natural gas markets, that prices reflect a fair and competitive interplay between supply and demand, and that no profits can be drawn from market abuse.

Market participants have to report all wholesale energy market transactions at the EU level to the Agency for the Cooperation of Energy Regulators (ACER). ACER is legally mandated to collect all relevant trading data in wholesale energy markets and to monitor the European wholesale energy markets (electricity and natural gas). When a REMIT breach is found in EU wholesale energy markets, the final enforcement decision of such a breach lies with the relevant regulatory authority. ACER facilitates the delivery of consistent decisions at European level from the regulatory authorities, by coordinating the follow-up of any possible REMIT breach. ACER also coordinates with the European Securities and Market Authority (ESMA), financial authorities, competition and other relevant authorities.

The Agency for the Cooperation of Energy Regulators (ACER)

Established under the third energy package, ACER's main role was originally confined to coordination, advising and monitoring. As the 2019 market design rules foresee much more cross-border cooperation, the lack of regional, cross-border oversight was seen as a potential problem, with the risk of diverging decisions and unnecessary delays. Regulation (EU) 2019/942 establishing an EU Agency for the cooperation of energy regulators recasts the regulation 713/2009.

In addition to coordinating the action of national energy regulators, ACER has therefore been granted additional competences in those areas where fragmented national decisions of cross-border relevance are likely to lead to problems for the internal energy market. For example, ACER will have oversight on the future regional entities ("Regional Coordination Centres") where TSOs (Transmission System Operators) are able to decide on those issues where fragmented and uncoordinated national actions could negatively affect the market and consumers. The approach also streamlines regulatory procedures. National regulators, deciding within ACER on those issues through majority voting, remain fully involved in the process.

Energy pricing models

As in other sectors, the EU electricity market has a number of different players in the supply chain – from producers (or generators) to suppliers to end-consumers - with wholesale prices at one end and end-user prices at the other.

The wholesale market in the EU is a system of marginal pricing, also known as a pay-as-clear market, where all electricity generators get the same price for the power they are selling at a given moment. Electricity producers (from national utilities to individuals who generate their own renewable energy and sell into the grid) bid into the market: they establish their price according to their production cost. Renewable energy sources are produced at zero cost and are therefore by definition always the cheapest. The bidding goes from the cheapest to most the expensive energy source. The cheapest electricity is bought first, next offers in line follow. Once the full demand is satisfied, everybody obtains the price of the last producer from which electricity was bought.

This model provides efficiency, transparency and incentives to keep costs as low as possible. There is general consensus that the marginal model is the most efficient for liberalised electricity markets. In fact, it was used by most EU countries before being anchored in EU legislation.

The alternative would not provide cheaper prices. In the pay-as-bid model, producers (including cheap renewables) would simply bid at the price they expect the market to clear, not at zero or at their generation costs.

Overall, it is better for consumers to have a transparent model that reveals the true costs of energy and provides incentives for individuals to become active in generating their own electricity.

Electricity market design